Investments, Mon. Feb. 4, '08

Investments, Mon. Feb. 4, '08

Investments , Wed. April 8, 09 Practical stuff: External forces (this time the admin) means that Tuesday April 21 is turned in unsupervised tuition. Youll get Hand-In #2 to work on. And well make it up from 8-9 on April 23 + 24.

I have posted two old exams and answers on the homepage. (This is the sum total in existence.) Today: Shapes Chapter 4. Focus: Pricing relations. If Chapter 3 looked like standard microeconomics to you, then Chapter 4 looks like standard asset pricing (though probably not to you).

But again, the fact that we get specific adds considerable twists. One way to express what the CAPM says: All investor returns depend only on the market return. And the dependence is linear. In Case 6 well see both these conclusions fail!

We start by looking at a bigger, more realistic financial market: 10 states(scenarios; telling names); note how there are one 5 market states (the intepretation is clear here; it isnt always). 5 assets (index funds; ditto) 2 agents (investors; ditto) The non-dependence problem is caused by incompleteness: Not all simple state

claims are traded. We will show that in a complete(d) market, investor returns do depend solely (and positively) on the market return (~aggregate consumption). First, well do it with APSIM; Case 7. Second, well do it mathematically/logically; Sharpe 4.4-4.8.

Third, we will go to incomplete models 4.9+ and start a journey towards pricing relations, formulas. Can we get CAPM? (Yes and/but thats not all.) Sharpes Sections 4.11 & 4.12 If there is a functional relationship (over scenarios) between price per chance and market return, R_M, then there exists (an economically meaniningful) pricing kernel,

f, and we get (as pure algebra) the relation E(R_i) r = b(i,M; f) (E(R_M) - r), where b(i,M; f) = cov(R_i,f)/cov(R_M,f). Economically meaningful means that there is a good chance that it will work well for the pricing of new securities, even in incomplete markets. Looks like CAPM to the casual observer. Its

not quite, because we need to know more about the exact nature of the functional relationship to get something really useful: Linear -> std. CAPM (Shaprpe 4.15-16) Log-linear -> power CAPM (Sharpe 4.17)

Recently Viewed Presentations

  • Periodic Table Groups and Trends - Chandler Unified School ...

    Periodic Table Groups and Trends - Chandler Unified School ...

    Main group elements are in the s-block and the p-block. The electron configurations of these are regular and consistent. The elements in each group have the same number of valence electrons. Elements in Group 1 are called alkali metals. These...
  • Guide to Support Medication Review in Older People

    Guide to Support Medication Review in Older People

    The Guide. At the endof 2015 a steering group was set up to begin to action a meaningful plan to deliver on the aims of the group. The first of the jobs placed on the work plan was to develop...
  • Don Quixote: Quiz show - Part 2 - Arlington Classics Academy

    Don Quixote: Quiz show - Part 2 - Arlington Classics Academy

    Don Quixote: Quiz show - Part 2. Students: make sure that you are seated by house, and that ALL of you are participating! Directions/Reminders. 1. Each question is timed depending on its difficulty. 2. Your answers MUST be written down...
  • Energy Audits - micrometer.com

    Energy Audits - micrometer.com

    Getting Started. Identify prospects. Independent convenience stores. Hotel/Bed and Breakfast guest folio. Master metered apartments (TX, OK) Anywhere bills exceed $200/month
  • Data Modeling

    Data Modeling

    What is spatial analysis? Spatial analysis the engine of GIS because it includes all of the transformations, manipulations, and methods that can be applied to geographic data to add value to them, to support decisions, and to reveal patterns and...
  • Data Management (Parcel Fabric) - Ohio

    Data Management (Parcel Fabric) - Ohio

    At ArcGIS 10, the parcel maintenance solution has three key parts. The first, is Parcel Editor Toolbar which is included with ArcGIS Desktop at ArcEditor and ArcInfo license levels. This toolbar contains the tools needed to access, and work with,...
  • Introduction and Key Secondclass Learning Objectives for the

    Introduction and Key Secondclass Learning Objectives for the

    What are tools NCOs have available to influence others? What is principled leadership? How do The Citadel core values shape leadership? ... Blue Book, FM 22-Citadel, White book, policies, CTM,etc. Expectations. You have de facto set a new standard
  • RCUK Assurance - Imperial College London

    RCUK Assurance - Imperial College London

    RCUK Assurance:- Objectives "To develop and manage a new Funding Assurance Programme for the Research Councils" Launch and manage new Funding Assurance Programme (FAP) to reflect the implementation of Full Economic Costing. Develop & implement Quality Assurance & Validation (QAV)...